What is Neo-liberalism? Part II

In the first installment of this essay, I suggested that neither the United States, nor the Eurozone, assist us in understanding the term ‘neoliberalism’ in a meaningful sense, unless we are first willing to abandon the idea that ‘neoliberalism’ is about political withdrawal and the giving way to free market economic competition. Nonetheless, it might reasonably be responded that even if what I have suggested is true, it remains undeniable that something important changed from the 1980s onwards, most especially in Britain and America, and to a lesser extent the wider Western world. To pick particularly obvious examples, under Ronald Reagan in the USA, and Margaret Thatcher in the UK, decisive economic changes were introduced: in particular, financial services were massively deregulated under claim that market competition was both profitable and safe for the wider economy, and heavy emphasis was put on privatization of services previously provided by the state. The interfering activity of the state was ostensibly rolled back to allow greater freedom for private enterprise, and a belief that this was the correct path to follow, succeeded by policies to try and implement that belief, perhaps stands as a plausible candidate for getting a grip on what neo-liberalism might be.

At a certain level of generality this must be true. But how it might add up to a coherent picture of something called neo-liberalism is much harder to ascertain. We now know where financial deregulation led: the mass rescue of private firms from oblivion, via state bailout. As Helen Thompson emphasises in her China and the Mortgaging of America: Economic Interdependence and Domestic Politics (2010) (see the first part of this essay), the death of the nation-state as the primary locus of decision-making power has been greatly exaggerated. Multinational corporations still operate in nation states and under their laws (however much they do succeed in bullying lawmakers). When some of the most important, powerful, and influential of those corporations failed, it was states that rescued them, and in several cases came to own them as a precondition of the entire modern economic system continuing to exist. When it came to the crunch, the market did not rule after all, and it was governments who proved the ultimate sources of power and authority, and hence domestic and international stability.

Similarly, although the mantra of privatization has dominated much British political discourse for the past three decades, its operation in practice is typically anything but the pure activity of private enterprise in a competitive market, and typically continues to rest upon enormous public subsidy in order to provide viable services. One need only look (to cite the most notorious example) at the scandal of British rail privatization: a putatively privatized system upheld at greater state expense than under the old nationalized network, but generating enormous private profits for state-backed monopolists, the gains for whom are not reasonably returned to taxpayers. The truth is that whatever rhetoric to the effect of promoting market competition has typically been used to dress-up economic (and frequently, social) policies in recent decades, this belies the truth that the state continues to interfere heavily in those transactions that have been putatively given over to the forces of the market. This is done in order to ensure the provision of essential goods and services that citizens demand as a condition of modern life, but which would fail to be adequately provided for if genuinely left to the forces of market allocation alone.

I want to be-2
Series ‘Belgravia’
Courtesy of Karen Knorr, Galerie Les Filles du Calvaire


Nonetheless, it is important not to lose sight of the fact that rhetoric matters. There can be no reasonable doubt that the key in which public debate is conducted changed dramatically from the 1980s onwards. This tells us something important about the way in which ideas were ostensibly justified to those expected to live with their consequences, and hence about what people could come to accept as comprehensible reasons for changes in the way society was organised. Indeed, rhetoric matters most especially when it is not just rhetoric, but expressive of some genuine underlying belief. Thatcher and Reagan certainly seemed to believe in the underlying ideological justification of the economic doctrines that they adopted, in particular the political worldview of state-minimalism that ostensibly accompanied them. Clinton’s ‘Triangulation’ in America, and New Labour’s ‘Third Way’ in Britain, signaled the fundamental acceptance by the centre-left of a changed political landscape, one which adopted very different sorts of economic policies from that which had been orthodoxy two decades previously, and of the social role of government that went with it (roughly: increasing withdrawal of the support offered to the most vulnerable, coupled with a relaxation of the demands made via taxation upon the wealthiest).

How did this revolution in beliefs come about? It may turn out that answering this question puts us on a better track in attempting to understand what neo-liberalism is. That is, in tracing the intellectual history of views which by the mid-1990s had become political and economic orthodoxy, we will likely gain more insight than if we attempt to deal with the miasma of current political and economic practices head-on, without the benefit of critical distance. Fortunately, a valuable contribution in this direction is made by James Forder’s Macroeconomics and the Phillips Curve Myth (2014), which sets itself directly against what has come to constitute the conventional wisdom about why Britain and American in the 1980s adopted economic policies which put these countries on the path to where they are today.

That conventional wisdom is that economic ‘monetarism’ – concentrating on interest rates and the money supply – was a necessary policy response to the intellectual and practical failures of ‘Keynesian’ economics (using tax and spend policies to purposefully direct the economy). Whether monetarism itself was a success is a separate question, but there can be little doubt that it was under the auspices of monetarist economic policy that much of the radical reform Thatcher and Reagan oversaw took place. Martin Wolf, as it happens, provides a conventional history to go with the conventional wisdom as to why monetarism was adopted by policymakers in the 1980s:

Monetarism’s great successes were in the 1960s and 1970s when naïve Keynesianism blew up because it underplayed inflationary expectations and believed too confidently in macroeconomic fine-tuning. The assumed trade-off between unemployment and inflation broke down, whereupon Keynesian fine-tuning of the real economy, via active fiscal and monetary policies, became largely discredited and was subsequently abandoned…[A]s a matter of historical fact, the Keynesians of the 1960s mostly downplayed inflation expectations and largely believed in fine-tuning. This opened up a vulnerable intellectual wing to the monetarist counter-attack, which combined the role of expectations, the centrality of money, and the difficulties inherent in discretionary macroeconomic fine-tuning.

Series ‘Belgravia’
Courtesy of Karen Knorr, Galerie Les Filles du Calvaire


Yet Forder shows just how wrong this conventional history is.

According to the received version of economic intellectual history now believed in by virtually all contemporary economists, a seminal paper of 1958 by A.W.H. Phillips claimed to establish a stable and permanent relationship between inflation and unemployment. This was the origin of the so-called “Phillips Curve”, which held that unemployment was inversely related to inflation. This finding (the conventional story goes) was then refined in a 1960 paper by Paul Samuelson and Robert Solow, which established a ‘menu’ of policy options for governments, who could trade-off unemployment against inflation. ‘Full-employment’ policy under Keynesian economic management could be achieved at the cost of inflation – which Samuelson and Solow allegedly advocated. Fellow contemporary economists were supposed to have widely endorsed this trade-off, and policymakers followed suit. However at the end of the 1960s and early 1970s, Milton Friedman and Edmund Phelps exposed earlier Keynesian economics as based on naïve assumptions regarding expectations of future price-level changes. This in turn dismantled the intellectual credibility of Keynesian economics predicated upon ‘exploitation’ of a Phillips Curve—a law that Friedman and Phelps claimed was itself an intellectual fallacy. In the 1970s, when so-called ‘stagflation’ (rising unemployment with simultaneous inflation) hit western economies, Friedman and Phelps were vindicated and their alternative monetarist theories of macroeconomic management were eventually adopted by policymakers, with Keynesian demand-management left behind.

Despite this story being widely believed, Forder conclusively demonstrates that none of it is true. The original Phillips paper purported to establish a stable, unchanging, universal relationship between wage (not price) levels and unemployment – and was roundly rejected by contemporaries as an unrealistic account of labour and industrial economics, because it ignored the irreducibly political nature of wage-bargaining, which was contingently organised in every society. Phillips’s paper was a shoddily assembled and data-poor effort, produced over a ‘wet weekend’ and rushed into print without proper peer review. The suggestion that it formed the basis of a decade and more of economic research and policy-making is simply false. As for Samuelson and Solow, they did draw on Phillips to a limited extent, but they certainly did not claim that there was a stable relationship between unemployment and inflation, that policymakers could straightforwardly pick and choose between different points on a trade-off curve, or that governments ought to permit inflation so as to artificially maintain high levels of employment. Indeed, although a large body of literature in the 1960s examined the relationship between employment and price levels, it is simply false to believe that there was a consensus around pro-inflationary policy as a trade-off for stable high employment. Furthermore, there is no evidence that policymakers were acting on any such belief in a stable trade-off, or were themselves unworried about price stability in the name of securing jobs. What Forder calls the Phillips Curve myth thus incorporates both the collective false memory of academic economics, and concomitant claims regarding the relationship between academic economics and real-world policy-making in the post-war period.

My Sons-2
Series ‘Belgravia’
Courtesy of Karen Knorr, Galerie Les Filles du Calvaire


During the mid 1970s, it suddenly (and somewhat unexpectedly) became received wisdom amongst economists that trade-offs based on a Philips Curve had been widely believed in by previous generations. The previous existence and domination of this “orthodoxy” was in turn incorporated into the folk-wisdom of economics, especially through the rapid appearance of this imagined past in textbooks of the late 1970s. (Forder dedicates a chapter to the difficult task of explaining just how this rapid and fundamental change came about.) The culmination of the sudden emergence of the Phillips Curve myth, and its entrenchment in subsequent collective belief, was Milton Friedman’s 1977 Nobel Prize speech. He there deployed the conventional story – with himself and Phelps in the role of gimlet-eyed revolutionaries shaking off the dogmas of the past – and indeed gave it much of the shape that it now possesses. Thus what Forder describes as “more or less the only piece of the history of economic thought” modern students of economics now learn, turns out to be a fable without any significant basis in reality.

Yet the consequences of this discovery go far beyond a quirk of academic self-imagining. In his 1977 lecture Friedman was quite consciously presenting his school of economic thought as representative of a true economic science, one that was displacing an earlier, sub-scientific approach that failed to appreciate the fundamental laws that govern economies. But what Forder demonstrates is that the economic thinking of the 1950s and 1960s was not naïve, nor based on embarrassing “intellectual blunders”, as the conventional story now maintains. Earlier approaches may not have conceived of economics as a ‘science’ in the way Friedman wished to characterize his own approach (and in which he has been mostly followed by professional economists since), but this is a question quite separate from whether it was therefore bad economic theory. The belief in the inadequacy of pre-monetarist macroeconomic theory, insofar as it failed to be properly economic theory, is itself partly a product of the Philips Curve myth. This has major consequences, because by ‘discrediting’ belief in an exploitable Philips Curve, what really occurred was the subsequent intellectual discrediting of Keynesian economics tout court. That is, the alleged intellectual victory of monetarism in the 1970s, and its political adoption in the 1980s, cannot be explained simply in terms of the essential intellectual inadequacy of its main rival. Rather that victory was partly, but to an important degree, ideological: based on the retroactive, but very rapid, misrepresenting of the nature and sophistication of alternative accounts of macroeconomic – and hence, social and political – reality.

This is important because as a matter of historical fact Keynesianism has long been married to a broadly leftist social, political, and economic outlook. The Keynesian view of an active state, which corrects for the fluctuating instabilities of market forces, has a natural attraction for political actors who wish to use the agencies of the state to engage in social programmes of welfare relief and state-generated employment. However these are (broadly speaking) policy goals that are antithetical to many on the political right. The ideological victory of monetarism was thus multifaceted: it allowed its natural allies on the political right to paint Keynesian economics as sub-scientific and thus discredited, and by extension removed both the putative policy tools, and the intellectual credibility, of economic policies geared towards social democratic goals. Reagan and Thatcher’s embracing of at least the rhetoric of monetarist economic theory accordingly also had multifaceted purposes, one in particular being the intellectual justification for the view that not only had the old economic policies failed, but they had failed because they were without intellectual foundation.

One must be careful not to overstate Reagan and Thatcher’s interest in the relative merits and truths of economic theories. It was more the case that the ideology of the New Right of the 1980s happily exploited the economic theories of monetarism, than that the Chicago School of economics gave life to new political movements. (The importance of Hayek’s political philosophy to Thatcherism’s origins should not be discounted, and Hayek’s ‘Austrian’ economic theory of free-market liberalisation is in many ways deeply antagonistic to Friedmanite monetarism.) But as Keynes himself famously wrote in the final chapter of the General Theory of Employment, Interest and Money (1936):

‘The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.’

If this is even half true, the evolution of macroeconomic theory in the post-war era matters to our present political possibilities and predicaments.

Series ‘Belgravia’
Courtesy of Karen Knorr, Galerie Les Filles du Calvaire


Modern macroeconomic theory is now overwhelmingly dominated by the view that economics is a form of science, one that ought to take the natural sciences, in particular physics, as its model. Underlying this view is the folk-wisdom of modern economic science as born from the errors of an embarrassing pre-theoretical age, most painfully revealed with the practical failure of Philips Curve-exploiting Keynesian economics in the 1970s. That self-image is in large measure based on the outcome not of anything that resembles scientific progress, but on ideological victory and retrospective rewriting of history by the victors. The economists of the 1950s and 1960s were not naïve, and their theories were not useless parts of a prehistory that can be safely ignored by the modern theorist. By ignoring the history of economic thought, Forder implies, we deprive ourselves of crucial resources for understanding not only how the world is, but how it might be – and therefore of how we might make it better. In any case, we can at least identify another thing that neoliberalism is not. It is not the political implementation of a science grown from the ashes of a defunct alternative, even if it is the very the belief in economics as a science that plays a crucial role in explaining the intellectual backstory of how we got to where we are today.


It can be tempting to suggest that ‘neoliberalism’ is simply a label used by those on the left to refer to all of the policies that they do not like, yet which have been enacted by Western governments of the last 35 years. In which case it is not surprising that it lacks any coherent content upon inspection, because it never really had any in the first place. But this cannot be enough, for the reason that important things did change during the 1970s and 1980s, and our present state of affairs is a direct consequence of that. If neoliberalism is not simply the increased reign of markets and the concomitant withdrawal of politics, one thing we can apparently nonetheless say is that it is an ideological victory which has something to do with the defeat of recent intellectual rivals, to the point where alternative ways of thinking about the world are forced out, and cannot sustain any priority in the minds of policymakers.

This seems confirmed and illustrated by policy responses to the 2008 crisis. As Wolf recounts, the immediate response to potentially cataclysmic downturns in the ‘real’ economy was staunchly Keynesian. Governments first rescued banks and nationalized failing institutions, and then employed large fiscal stimulus packages to keep economies from collapsing. Thankfully, the western world had learned the lessons of the 1930s, and was able to avoid another Great Depression. But that support, Wolf argues, was withdrawn far too soon under the mantra of “austerity” – a nakedly ideological attempt to reconfigure the role of the social state under the specious pretext of debt-control, at a time when sound economic policy, and the well-being of ordinary citizens, demanded a very different pro-active response. What was achieved instead of a Great Depression was a Great Recession.

Historically speaking, this is progress. But it is progress of a bitter kind, for it did not need to be this way. Yet what is remarkable is the extent to which policymakers uniformly acted as though it did: as though austerity and retrenchment were the only possibility. Neoliberalism, then, must in some sense be understood in relation to how the horizons of economic possibility have been narrowed so dramatically in the minds of decision-makers. This is not a product of the march of economics as a science, but at least in part the march of an ideology of economics married to a particular vision of politics, one which is deeply hostile to the social-democratic inheritance of the post-war world. Frustratingly, however, this conclusion only seems to land us in a circle: neoliberalism is a configuration of politics’ subordination of economics, and our present political subordination of economics is neoliberalism. We seem, after all, no closer to an answer than when we started.

Series ‘Belgravia’
Courtesy of Karen Knorr, Galerie Les Filles du Calvaire


Perhaps, though, we should not feel too frustrated. In Plato’s dialogue The Meno, Socrates argues his young interlocutor into a state of desperate bewilderment. Meno had thought that he knew what virtue was, but Socrates’s careful probing exposes all of Meno’s beliefs as false, leaving him with no sense that he knows anything about virtue at all. Meno complains that Socrates has numbed him “like a stingray”, leaving him in a state of useless intellectual paralysis. But Plato implies to his readers that Socrates has in fact done Meno a favour. By eliminating previous false beliefs and complacencies, Meno can begin to build on a solid foundation, and perhaps find his way to a true understanding. Finding out what something is sometimes requires first finding out what it is not. We are in something of the same position with ‘neoliberalism’: after decades of accreted confusions and misunderstandings, what we need is to sting ourselves into seeing what is false, so that we might in turn begin to see what is true.

Paul Sagar is a JRF (postdoctoral fellow) at King's College, Cambridge, focusing on the history of political thought and contemporary political theory.

  • RJ

    Thanks Paul, I read this article with interest. But I must admit that I never really understand questions like “What is [some word to be defined]?”. It seems to me that the word means nothing in and of itself; it has not transcendental meaning that we must discover by some deep analysis. It’s a word that we have made up for our convenience; it’s a label, or short-hand, that we use to indicate some school of thought, intellectual tradition, or philosophy. The relevant philosophy evolves, and therefore so does the “meaning” of the label. In addition, we start using the label to refer to different, but related, sets of philosophies. None of these definition is wrong; although some are more useful than others. A definition’s merits depends also on acceptance; it is practical if we agree on the definition if we are to use the label in our conversations and understand each other. If there are strong disagreements as to the “best” definition, then we can employ several definitions, for which we may invent additional labels, such as definitions in the broad or narrow sense. In many cases, only a spectrum of a definitions may be acceptable. It is meaningless to argue about the “right” definition of the efficient market hypothesis. It is better to agree there is a weak and a strong form, and, if that does not suffice, invent additional positions on the spectrum. Thus, it seems to me that neo-liberalism “is” nothing in and of itself, has no single meaning, no fixed meaning, and no God-given “true” meaning, in some transcendental world that we have to discover. We can be descriptive about the different meanings, both on the spectrum and over time, but it’s almost certainly useless to be prescriptive about it. And, as far academic branding is concerned, it seems to me that the invention of a new label is more likely to succeed than a proposed re-definition of an old label.

  • Luke Hawksbee

    RJ, I think you’ve conflated the definition of a term with the characterisation or analysis of the concept that the term refers to.

    My understanding of these articles is not that Paul is trying to ask “how ought we to define this term that we use, ‘neoliberalism’?” but rather “what is the nature of this thing that we call ‘neoliberalism’?” The former is, essentially, an academic debate about definitions, of interest perhaps to philosophers and intellectual historians, but almost certainly not to anybody else. The latter question, however, is one of political analysis of concrete real-world phenomena or, to put it another way, of ‘actual’ – rather than *merely* intellectual – history (which is not to disparage intellectual history).

    Exploration and analysis of what has been going on for the past few decades as part of the neoliberal project is important and fruitful in developing an understanding of likely future lines of attack, of understanding the ways in which new developments will be weaponised, and correspondingly in working out how to defend and fight back against it, what is the nature of the project that must be dismantled and the ideology which must be negated, etc. It’s far from just being a picky debate over the ‘correct’ definition of a word (which is assumed to somehow pre-exist the construction of the project itself, floating around in the cosmos as some kind of Platonic definition).

  • Greg Kaser

    The constant and inconsistent usage of the term ‘neo-liberalism’ calls for elucidation and the article certainly tackles this very well. As Luke Harding also pointed out in his comments on Part I, neo-liberalism is not about the extent of state intervention in the market but rather the kind of relationship between them. There is also a relationship between contemporary economics (the science, usual caveats apply) and neo-liberalism (the political approach or ideology). Quite what that relationship consists of is, however, rather glossed over. Neo-liberalism has a distinct perspective on the role of the state, in contrast to classical liberalism. The latter advocated a minimal role – that of the night-watchman – whereas neo-liberals accept a wider remit, as is cited with a number of cases. In my view, the wider role for the state permitted by neo-liberalism is justified by the existence of ‘market failure’, the theory of which is to be found in neoclassical economics. It is the guiding principle of the European Commission’s approach to regulating state aid, for example. The market failure test also explains why neo-liberal US governments encouraged the underwriting of mortgages by Fannie and Freddie and the state financing of infrastructure, as described in Part I.

    This indicates that the relationship between science and politics is between classical economics (especially that of Adam Smith and John Stuart Mill) with classical liberalism and neoclassical economics with neo-liberalism.

    Thus, I suggest, neo-liberalism is not a basket full of “the policies [the left] do not like”, but an attempt by liberals to theorize the limits to state intervention. Incidentally, the fact that liberals dislike being called neo-liberals is not sufficient objection to the use of the term in the social sciences.

    Turning briefly to the macroeconomic aspects analyzed in the article, I note that the contemporary economics taught at university level presents a model where Keynesian insights are combined with the vestiges of Monetarism, constructed upon a foundation of neoclassical ‘micro-foundations’ (namely, the theory of rational expectations and asymmetry of information). In this model the Philips Curve still plays a role, albeit as re-interpreted by Milton Friedman, etc.